Industrial policy
The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote structural change".

Industrial policies are sector specific, unlike broader macroeconomic policies. Examples of horizontal, economywide policies are tightening credit or taxing capital gain, while examples of vertical, sector-specific policies comprise protecting textiles from foreign imports or subsidizing export industries. Free market advocates consider industrial policies as interventionist measures typical of mixed economy
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...


Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....

. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing. By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market.


The traditional arguments for industrial policies go back as far as the 18th century. Early arguments in favor of selective protection of industries have been prominently associated with US economist and politician Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...

 (1790) and the German economist Friedrich List
Friedrich List
Georg Friedrich List was a leading 19th century German economist who developed the "National System" or what some would call today the National System of Innovation...

 (1844). These arguments were picked up subsequently by scholars of early development economics
Development economics
Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...

 such as Albert Hirschman and Alexander Gerschenkron
Alexander Gerschenkron
Alexander Gerschenkron was a Russian-born American Jewish economic historian and professor in Harvard, trained in the Austrian School of economics.Gerschenkron kept to his roots - in his economics, history and as a critic of Russian literature...

, who called for the selective promotion of key sectors in overcoming economic backwardness.

While early development theory affirmed the crucial role of industrial policy, the rise of neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

 in 1970s - also known as the counter-revolution in development thinking - was more critical towards the interventionist measures and instead stressed the importance of free market laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....

in promoting structural change. In recent years, however, the advent of endogenous growth theories has led to a convergence towards acknowledging the role of the state in correcting externalities and market failures.

Historically, there is a growing consensus that most developed countries, including United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

 and France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...

, have intervened actively in their domestic economy through industrial policies. These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...

, Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

 or Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...

. More recently, the rapid growth of East Asian economies, or the newly industrialized countries
Newly industrialized countries
The category of newly industrialized country is a socioeconomic classification applied to several countries around the world by political scientists and economists....

 (NICs), has also been associated with active industrial policies that selectively promoted manufacturing and facilitated technology transfer and industrial upgrading. The success of these state-directed industrialization strategies are often attributed to developmental state
Developmental state
Developmental state, or hard state, is a term used by international political economy scholars to refer to the phenomenon of state-led macroeconomic planning in East Asia in the late twentieth century...

s ): The Developmental State and strong bureaucracies such as the Japanese MITI. Many of these domestic policy choices, however, are now seen as detrimental to free trade and are hence limited by various international agreements such as WTO, TRIM
Trim may refer to:* Cutting small pieces off something** Book trimming, a stage of the publishing process** Editing*** Editing a posting style in online discourse** Pruning, trimming as a form of pruning often used on trees-Places:...

 or TRIPS. Instead, the recent focus for industrial policy has shifted towards the promotion of local business cluster
Business cluster
A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. In urban studies, the term agglomeration is used...

s and the integration into global value chain
Value chain
The value chain, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.-Firm Level:...


During the Reagan Administration
Reagan Administration
The United States presidency of Ronald Reagan, also known as the Reagan administration, was a Republican administration headed by Ronald Reagan from January 20, 1981, to January 20, 1989....

, an economic development initiative called Project Socrates
Project Socrates
Project Socrates was a US Defense Intelligence Agency program established in 1983 within the Reagan administration. This classified program, founded and directed by physicist Michael Sekora, was designed for the purpose of identifying the root cause of the United States' declining ability to...

 was initiated to address US decline in ability to compete in world markets. Project Socrates, directed by Michael Sekora, resulted in a computer-based competitive strategy system that was made available to private industry and all other public and private institutions that impact economic growth, competitiveness and trade policy. A key objective of Socrates was to utilize advanced technology to enable US private institutions and public agencies to cooperate in the development and execution of competitive strategies without violating existing laws or compromising the spirit of "free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

". President Reagan was satisfied that this objective was fulfilled in the Socrates system. Through the advances of innovation age technology, Socrates would provide "voluntary" but "systematic" coordination of resources across multiple "economic system" institutions including industry clusters, financial service organizations, university research facilities and government economic planning agencies. While the view of one president and the Socrates team was that technology made it virtually possible for both to exist simultaneously, the industrial policy vs. free market debate continued as later under the George H. W. Bush administration, Socrates was labeled as industrial policy
Industrial policy
The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...

 and de-funded."

In August 2010, The Economist highlighted a renewed trend of industrial policy in rich countries, with examples of active government intervention in the United States, Britain, France, Germany, Japan and South Korea. The revival has been driven by four main forces: pressure to reduce unemployment and stimulate growth; a desire to 'rebalance' certain economies away from financial services; popular demands for increased government action; and the perceived need to respond to apparently successful policies being pursued in China.


The main criticism against industrial policy arises from the concept of government failure
Government failure
Government failure is the public sector analogy to market failure and occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention...

: While industrial policy is seen not as harmful per se, governments - especially in developing countries - often lack the required information and capabilities to successfully select and promote sectors. Even though the East Asian Tigers
East Asian Tigers
The Four Asian Tigers or Asian Dragons is a term used in reference to the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan. These nations and areas were notable for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s...

 provided successful examples of heterodox interventions and protectionist industrial policies, industrial policies such as import-substitution-industrialization (ISI) has failed in many other regions such as Latin America and Sub-Saharan Africa: If governments are captured by vested interests, industrial policy would only support the rent-seeking of an elite, while distorting the efficient allocation of resources by market forces at the same time.

Debates on the 'How to' of Industrial Policy

Despite existing criticism, there is a growing consensus in recent development theory that state interventions are often necessary when market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

s prevail. Market failures often exist in presence of externalities and natural monopolies. These market failures hinder the emergence of a well-functioning market and corrective industrial policies are required to ensure the allocative efficiency of a free market. In practice, these interventions are often aimed at regulating networks, public infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...

, R&D or correcting information asymmetries. While the current debate has shifted away from dismissing industrial policies overall, the best ways of promoting industrial policy are sill widely debated..

One key question is which kinds of industrial policy are most effective in promoting economic development. For example, economists debate whether developing countries should focus on their comparative advantage by promoting mostly resource- and labour-intensive products and services, or invest in higher-productivity industries, which may only become competitive in the longer term.

Much debate also still surrounds the issue whether government failures are more pervasive and severe than market failures. Some argue that the lower government accountability and capabilities, the higher the risk of political capture of industrial policies, which may be economically more harmful than exisiting market failures.

Of particular relevance for developing countries are the conditions under which industrial policies may also contribute to poverty reduction, such as a focus on specific industries or the promotion of linkages between larger companies and smaller local enterprises.

See also

  • Import substitution industrialization
  • Developmental state
    Developmental state
    Developmental state, or hard state, is a term used by international political economy scholars to refer to the phenomenon of state-led macroeconomic planning in East Asia in the late twentieth century...

  • Infant industry argument
    Infant industry argument
    The Infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar...

  • Ministry of International Trade and Industry
    Ministry of International Trade and Industry
    The Ministry of International Trade and Industry was one of the most powerful agencies of the Government of Japan. At the height of its influence, it effectively ran much of Japanese industrial policy, funding research and directing investment...

  • Chaebol
    Chaebol refers to a South Korean form of business conglomerate. They are global multinationals owning numerous international enterprises. The term is often used in a context similar to that of the English word "conglomerate"...

External links

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